Chapter # 2Chapter # 2 Prepared By: Prepared By: KamranKamran

Lecturer Kardan UniversityLecturer Kardan University

Email addressEmail address:: kamranuni@yahoo.com kamranuni@yahoo.com

Origin of the terms Debit and Origin of the terms Debit and CreditCredit

The terms Debit and Credit have Latin roots. Debit comes from Debere which means "to owe". The Latin debitum means "debt".

Credit comes from the Latin word Credere, which means "to believe" or "to entrust".

It is more common to use the plural terms "Debits" and "Credits".

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Why we use Why we use CrCr for Credit for Credit and and DrDr for Debit for DebitThere are a few possible explanations.

One theory asserts that the DR and CR come from the Latin words debitum and creditum which are "debere" and "credere", respectively.

Another theory is that DR stands for "debit record" and CR stands for "credit record".

Finally, some believe that DR notation is short for "debtor" and CR is short for "creditor".

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Classes of Accounts

Under American approach the accounts are classified into five categories.

1) Assets Accounts 2)Liabilities Accounts 3)Owner Equity(Capital) 4)Revenue Accounts 5)Expenses Accounts

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AssetsAssetsWhatever business possesses

which have to give future economic benefits are called asset

OR All valuables possessed by a

business are called assets.For Example land, building,

furniture, car etc

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LiabilitiesLiabilities

The claim of the external parties on the assets of the business is called Liabilities

For Example Loan payable, Rent payable, Salaries payable etc.

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I will pay you later

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Owner EquityOwner Equity

It is the amount invested by the owner of the business.

ORThe residual claim of the owner on the assets of the business is called owner equity.

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RevenueRevenue

The price of goods sold or services rendered is called revenue.

For Example If business sells 1000 pens @ 5 per pen then 5*1000= 5000 is its revenue.

If 20 patient comes to a Doctor and he charges 200 fee from every patient then 20 * 200 =4000 is its revenue.

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ExpensesExpenses

The cost of doing business is called expense.

OR

The cost of goods and services used up in the process of earning revenue is called expense.

Examples. salaries, utility bills etc

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Rules of Debit and CreditRules of Debit and CreditThe rules of debit and credit

related to five(5) kinds of accounts are stated as under:

1)For Assets Accounts: Increase in an assets account

is recorded as Debit. Decrease in an assets account

is recorded as Credit.

2)For Liability Account: Decrease in liability account is

recorded as Debit. Increase in liability account is

recorded as Credit. 3)For Owner Equity OR Capital Account:

Decrease in capital account is recorded as Debit.

Increase in capital account is recorded as Credit.

4)For Revenue Accounts: Decrease in revenue account is

recorded as Debit. Increase in revenue account is

recorded as Credit. 5)For Expense Account: Increase in expense account is

recorded as Debit. Decrease in expense account is

recorded as Credit.

Rules for Debit & CreditRules for Debit & CreditNature of Account

Debit Credit

Assets Increase Decrease

Expenses Increase Decrease

Liabilities Decrease Increase

Owner Equity Decrease Increase

Revenues Decrease Increase

Classify the following into Assets, Classify the following into Assets, Liabilities, Owner Equity, Expenses and Liabilities, Owner Equity, Expenses and RevenueRevenueMachinery, Bank, Rent Paid, Cash,

Sales, Purchases, Goodwill, Capital, Sales Return, Purchase Return, Car, Carriage, Commission Received,

Account Receivable, Account Payable

Furniture, Salaries, Land, Building, Repair charges, Equipments.

©2008 Pearson Prentice Hall. All rights reserved.

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Double-entry AccountingDouble-entry Accounting

Each transaction affects at least two accounts

Double entry systemDouble entry system

The system under which the double effect of every transaction is recorded is called double entry system.

Procedure of finding Procedure of finding debit and creditdebit and credit

1. First we have to analyze the event whether this is a simple event or economic event (transaction).

2. By the analysis of transaction find out the two or more accounts which are involved in that transaction.

3. The account so found are classified in to assets, liabilities, capital, Revenue expense.

4. Increase and decrease in account(s) are determine.

5. Finally rule of Debit & Credit is applied.

Transaction Accounts Involved

Classes of Account

Increase/ Decrease

Debit Credit

Ahmed started a business with cash 50000 $

CashCapital

AssetsOwner Equity

IncreaseIncrease

5000050000

Purchased Machinery on cash 10000$

MachineryCash

AssetsAssets

IncreaseDecrease

1000010000

Purchased goods on cash 5000$

PurchasesCash

ExpensesAssets

IncreaseDecrease

50005000

Sold goods on cash for 3000$

CashSales

AssetsRevenue

IncreaseIncrease

30003000

Paid wages 500$ WagesCash

ExpensesAssets

IncreaseDecrease

500500

Purchased furniture on credit from Ali 2000$

FurnitureAli(O/ Sider)

AssetsLiabilities

IncreaseIncrease

20002000